CAF - State Capabilities in Colombian Municipalities Measurements and Determinants

Banco de Desarrollo de América Latina

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Título: CAF - State Capabilities in Colombian Municipalities Measurements and Determinants
Autor: Banco de Desarrollo de América Latina
Categoría: Infralegal
Área del derecho: Cumplimiento
Año: —

STATE CAPABILITIES IN COLOMBIAN MUNICIPALITIES:

MEASUREMENTS AND DETERMINANTS

N° 2014/08

STATE

CAPABILITIES IN

COLOMBIAN

MUNICIPALITIES:

MEASUREMENTS

AND

DETERMINANTS

Perry, Guillermo García, Eduardo Jiménez, Pedro ,, fi DEVELOPMENT BANK V' ... OF LATIN AMERICA2 STATE CAPABILITIES IN COLOMBIAN MUNICIPALITIES: MEASUREMENTS AND DETERMINANTS.

STATE CAPABILITIES IN COLOMBIAN MUNICIPALITIES:

MEASUREMENTS AND DETERMINANTS

Perry, Guillermo García, Eduardo Jiménez, Pedro CAF – Working paper N°2014/08

ABSTRACT

This paper constructs a comprehensive set of State Capacity indicators for Colombian municipalities, focusing in four basic governmental capabilities: fiscal, financial, physical and operational. First, a group of relevant variables was selected from a vast array of sources and classified into these four categories. Second, synthetic indicators were constructed using Principal Component Analysis (six in total as operational capabilities were further divided into three subcategories). These indicators allow us to study differential effects of a wide scope of potential determinants and controls upon each component. Such determinants included geographical features, natural resources, internal conflict, local political competition and early indigenous presence and immigration Controls included present income per capita and population density. This interdisciplinary variable selection provides a holistic explanation of State Capabilities related to public service delivery in Colombian municipalities.

indigenous presence and immigration Controls included present income per capita and population density. This interdisciplinary variable selection provides a holistic explanation of State Capabilities related to public service delivery in Colombian municipalities.

Small sections of text, that are less than two paragraphs, may be quoted without explicit permission as long as this document is stated. Findings, interpretations and conclusions expressed in this publication are the sole responsibility of its author(s), and it cannot be, in any way, attributed to CAF, its Executive Directors or the countries they represent. CAF does not guarantee the accuracy of the data included in this publication and is not, in any way, responsible for any consequences resulting from its use.

CAPACIDAD ESTATAL A MUNICIPAL EN COLOMBIA:

INDICADORES Y DETERMINANTES

Perry, Guillermo García, Eduardo Jiménez, Pedro CAF – Documento de trabajo N°2014/08

RESUMEN

En este trabajo se construye un conjunto amplio de indicadores de la capacidad del Estado para los municipios colombianos, centrándose en cuatro capacidades gubernamentales básicas: fiscales, financieras, físicas y operacionales. En primer lugar, un grupo de variables relevantes fueron seleccionadas de una amplia gama de fuentes y se divide en estas cuatro categorías. En segundo lugar, los indicadores sintéticos se construyeron utilizando Análisis de Componentes Principales (seis en total y las capacidades operativas se dividen a su vez en

relevantes fueron seleccionadas de una amplia gama de fuentes y se divide en estas cuatro categorías. En segundo lugar, los indicadores sintéticos se construyeron utilizando Análisis de Componentes Principales (seis en total y las capacidades operativas se dividen a su vez en tres subcategorías). Estos indicadores nos permiten estudiar los efectos diferenciales de una amplia gama de posibles factores determinantes y los controles sobre cada componente. Estos determinantes incluyen: características geográficas, recursos naturales, conflictos internos, la competencia política local, presencia indígena temprana, controles de inmigración, incluidos el ingreso presente per cápita y la densidad de población. Esta interdisciplinaria selección de variables proporciona una explicación integral de las capacidades del Estado relacionadas con la prestación de servicios públicos en los municipios colombianos.

Pequeñas secciones del texto, menores a dos párrafos, pueden ser citadas sin autorización explícita siempre que se cite el presente documento. Los resultados, interpretaciones y conclusiones expresados en esta publicación son de exclusiva responsabilidad de su(s) autor(es), y de ninguna manera pueden ser atribuidos a CAF, a los miembros de su Directorio Ejecutivo o a los países que ellos representan. CAF no garantiza la exactitud de los datos incluidos en esta publicación y no se hace responsable en ningún aspecto de las consecuencias que resulten de su utilización.

..... OF LATIN AMERICA1

CEDE Centro de Estudios sobre Desarrollo Económico 1

State Capabilities in Colombian Municipalities 1 Measurement and Determinants

..... OF LATIN AMERICA1

CEDE Centro de Estudios sobre Desarrollo Económico 1

State Capabilities in Colombian Municipalities 1 Measurement and Determinants Guillermo Perry, Eduardo García, Pedro Jiménez 2

Abstract This paper constructs a comprehensive set of State Capacity indicators for Colombian municipalities, focusing in four basic governmental capabilities: fiscal, financial, physical and operational. First, a group of relevant variables was selected from a vast array of sources and classified into these four categories. Second, synthetic indicators were constructed using Principal Component Analysis (six in total as operational capabilities were further divided into three subcategories). These indicators allow us to study differential effects of a wide scope of potential determinants and controls upon each component. Such dete rminants included geographical features, natural resources, internal conflict, local political competition and early indigenous presence and immigration Controls included present income per capita and population density. This interdisciplinary variable sel ection provides a holistic explanation of State Capabilities related to public service delivery in Colombian municipalities.

Keywords: State Capacity, Principal Components Analysis, Institutional

Development.

JEL Codes: C38, F63, D02

1 This paper was financed by CAF-Banco de Desarrollo de América Latina. 2 Guillermo Perry is Professor at the Department of Economics, Universidad de Los Andes, Colombia, and a Non-resident Fellow at the Center for Global Development. Eduardo García and Pedro Jimenez are research assistants at the Department of Economics, Univer sidad de Los Andes. Contact gperry@uniandes.edu.co, e.garcia916@uniandes.edu.co and pjimenez@gmail.com. 1

State Capabilities in Colombian Municipalities 1 Measurement and Determinants Guillermo Perry, Eduardo García, Pedro Jiménez 2

Abstract This paper constructs a comprehensive set of State Capacity indicators for Colombian

State Capabilities in Colombian Municipalities 1 Measurement and Determinants Guillermo Perry, Eduardo García, Pedro Jiménez 2

Keywords: State Capacity, Principal Components Analysis, Institutional

Development.

JEL Codes: C38, F63, D02

State Capabilities in Colombian Municipalities 1 Measurement and Determinants Guillermo Perry, Eduardo García, Pedro Jiménez 2

Abstract This paper constructs a comprehensive set of State Capacity indicators for Colombian municipalities, focusing in four basic governmental capabilities: fiscal, financial, physical and

operational. First, a group of relevant variables was selected from a vast array of sources and classified into these four categories. Second, synthetic indicators were constructed using Principal Component Analysis (six in total as operational capabilities were further divided into three subcategories). These indicators allow us to study differential effects of a wide scope of potential determinants and controls upon each component. Such dete rminants included geographical features, natural resources, internal conflict, local political competition and early indigenous presence and immigration Controls included present income per capita and population density. This interdisciplinary variable sel ection provides a holistic explanation of State Capabilities related to public service delivery in Colombian municipalities.

Keywords: State Capacity, Principal Components Analysis, Institutional

Development.

JEL Codes: C38, F63, D02

STATE CAPABILITIES IN COLOMBIA N MUNICIPALITIES 5

Measurement and Determinants6

1. INTRODUCTION AND SUMMARY 1.1 The dimensions of State Capacity State Capacity is a widely used term in political science and pub lic economics. It is broadly defined as the state ’s ability to effectively perform a predetermined set of tasks .

its ability to administer efficiently, or simply in its capacity to foster economic development7. Thus, it ranges from capacities for national defense, warfare and internal security, to those required to raise taxes, design and execute efficient p ublic service delivery policies , protect property rights and enforce contracts. Such a wide range of tasks complicates the coinage of a single operational definition. The economics academic mainstream has so far focused its attention on state capacity’s fiscal dimension, assessing the effect of several social, political, economic and security variables on taxes and other self-generated revenues of national or subnational governments. See for example Besley and Persson (2008); Cardenas, Eslava and Ramirez (2013); and Theis (2010). Another group of economists has concentrated on operational capa bilities linked to accountability, governmental transparency, contracting procedures and general bureaucratic quality. They argue that a competent state must not only be able to raise tax revenues, but also to transform such revenues efficiently into public goods and services of good quality.

5 This paper was financed by CAF-Banco de Desarrollo de América Latina 6 We thank Pablo Sanguinetti and other partici pants in the 2015 RED CAF meeting in Buenos Aires for useful comments on an earlier partial draft. 7 Cingolani, L, Thomsson, K, and D. de Crombrugghe, (2013) 3

STATE CAPABILITIES IN COLOMBIA N MUNICIPALITIES 5

Measurement and Determinants6

1. INTRODUCTION AND SUMMARY 1.1 The dimensions of State Capacity State Capacity is a widely used term in political science and pub lic economics. It is broadly defined as the state ’s ability to effectively perform a predetermined set of tasks .

However, the definition of such a set varies considerably among different authors , depending on whether the interest lies in the statés power to discourage violent conflict, in its ability to administer efficiently, or simply in its capacity to foster economic development7. Thus, it ranges from capacities for national defense, warfare and internal security, to those required to raise taxes, design and execute efficient p ublic service delivery policies , protect property rights and enforce contracts. Such a wide range of tasks complicates the coinage of a single operational definition. The economics academic mainstream has so far focused its attention on state capacity’s fiscal dimension, assessing the effect of several social, political, economic and security variables on taxes and other self-generated revenues of national or subnational governments. See for example Besley and Persson (2008); Cardenas, Eslava and Ramirez (2013); and Theis (2010). Another group of economists has concentrated on operational capa bilities linked to accountability, governmental transparency, contracting procedures and general bureaucratic quality. They argue that a competent state must not only be able to raise tax revenues, but also to transform such revenues efficiently into public goods and services of good quality.

Most indicators used in this approach stem from perception surveys and expert opinions, such as the Transparency International’s indexes or those on which the World Banks Governance Indicators are based. For further detail on these perception indicators’, see, for example, Pritchett, Woolcock and Andrews (2010) and Kaufmann, Kray and Mastruzzi (2009) Finally, as mentioned, there is an institutional conception of state capacity as the ability to protect property rights and enforce contracts. This perspective is present, for example, in

example, Pritchett, Woolcock and Andrews (2010) and Kaufmann, Kray and Mastruzzi (2009) Finally, as mentioned, there is an institutional conception of state capacity as the ability to protect property rights and enforce contracts. This perspective is present, for example, in the seminal works of Engelman and Sokoloff (2002), Acemoglu and Johnson (2005) and the subsequent literature evaluating the impact of initial factor endowments , European immigrants and colonial institutions on presentday pr operty rights, constraints on the executive power and economic development.

1.2 State Capacity in Decentralized Settings Most often than not, State Capacity refers to the ability of a National State to perform such a diversity of tasks. However, in highly decentralized States it is legitimate to inquire about the ability of subnational governments to carry on the different tasks under their responsibility. Such inquiries are especially important in the context of Federal States. Colombia is a peculiar case, as it is a unitary republic with a considerable degree of decentralization of State functions and a ctivities, both with respect to Departments (the equivalent of States or Provinces in other countries) or Municipalities. Actually, the percentage of public expenditures executed by subnational agencies in Colombia is higher than in some Federal Latin American countries, such as Mexico or Venezuela, and almost as high as in the most decentralized of them (Brazil and Argentina). Another particular trait of Colombia is the large weight of municipalities in execution of public expenditures, service delivery and even tax collections, which are significantly higher and more dynamic in municipalities than in Departments.5 5

fully under their responsibility since 1986, though the Central Government provides part of the required financial resources through automatic transfers and keeps important regulatory and supervisory functions8. Provision of basic health services was municipalized in 1989 and departments and municipalities also receiv e automatic transfers from the Central Government for this purpose. However, a social security reform in 1993 established a comp etitive health insurance system, initially financed from individual mandatory contributions and since 2013 mostly through a special national tax, in which public and private health insurance and service providers compete under Government regulation and supervision , which interacts in a complex way with municipal responsibilities. Municipalities own and manage health insurance agencies, health posts and centers and, in many cases, public hospitals, and remain in charge of some basic prevention policies. Basic e ducation was also fully decentralized in Colombia since 1991 , though the Central Government provides most of the required fi nancial resources through automatic transfers, keeps important regulatory and supervisory powers and, critically, selects and allocate public teachers and determine their remuneration. Responsibility of basic education services was initially transferred to Departments and later on also to certified municipalities, which include all large municipalities. However, even smaller municipalities play a critical role in managing and supervising public schools. In addition, even while central government transfers and royalties represent in most cases the bulk of financial resources available to municipalities for these services and general purposes, local taxes (and other locally generated revenues) are an important fraction of municipal finances in many cases and, overall, have been increasing rapidly since 2002 . Indeed, municipalities have higher taxing capacity than Departments, as they can determine and collect property taxes, índustry and commercé taxes (which have evolved towards a

8 Through an autonomous Water Regulatory Commission and an autonomous Superintendence of Public Services 5

Services 5

In particular, municipalities play a key role in the delivery of three critical public services: water supply, basic health and educational services. Water supply and sewerage fall fully under their responsibility since 1986, though the Central Government provides part of the required financial resources through automatic transfers and keeps important regulatory and supervisory functions8. Provision of basic health services was municipalized in 1989 and departments and municipalities also receiv e automatic transfers from the Central Government for this purpose. However, a social security reform in 1993 established a comp etitive health insurance system, initially financed from individual mandatory contributions and since 2013 mostly through a special national tax, in which public and private health insurance and service providers compete under Government regulation and supervision , which interacts in a complex way with municipal responsibilities. Municipalities own and manage health insurance agencies, health posts and centers and, in many cases, public hospitals, and remain in charge of some basic prevention policies. Basic e ducation was also fully decentralized in Colombia since 1991 , though the Central Government provides most of the required fi nancial resources through automatic transfers, keeps important regulatory and supervisory powers and, critically, selects and allocate public teachers and determine their remuneration. Responsibility of basic education services was initially transferred to Departments and later on also to certified municipalities, which include all large municipalities. However, even smaller municipalities play a critical role in managing and supervising public schools. In addition, even while central government transfers and royalties represent in most cases the bulk of financial resources available to municipalities for these services and general purposes, local taxes (and other locally generated revenues) are an important fraction of municipal finances in many cases and, overall, have been increasing rapidly since 2002 . Indeed, municipalities have higher taxing capacity than Departments, as they can determine and collect property taxes, índustry and commercé taxes (which have evolved towards a

8 Through an autonomous Water Regulatory Commission and an autonomous Superintendence of Public Services6 6

Indeed, municipalities have higher taxing capacity than Departments, as they can determine and collect property taxes, índustry and commercé taxes (which have evolved towards a

8 Through an autonomous Water Regulatory Commission and an autonomous Superintendence of Public Services6 6

gross revenues tax ap plied to most economic activities), and a wide set of taxes and fees related to transit, registry of vehicles and diverse services. In contrast, Departments have a narrower and less dynamic tax base, related mostly to alcohol and tobacco consumption. Many municipalities make important contributions from local taxes to the financing of water supply and basic health and education services.

1.3 Definitions, data and methodology In this paper , we adopt a comprehensive definition of State C apacity that embeds several elements of the different conceptions enunciated above and apply it to Colombian municipalities. More specifically, we dissect the concept of State Capacity into four distinct components, each evaluating a crucial feature of state capabilities for the provision of basic public goods and services at the municipal level. To begin with, we collected and use indicators of the capacity to raise local taxes, as previous studies have shown that these tend to lead to higher accountability and efficiency and quality of services than resources obtained without local fiscal effort (Central Government transfers and royalties) . See, for e xample, Pachón and Sánchez (2013). Specifically, we used local tax revenue over municipal GDP, tax offices per in habitant and square kilometer and an indicator of local tax effort constructed by Pachón and Sánchez. Second, we collected indicators of savings and investment capacity as these are essential to build assets required for service delivery. Colombian public finance figures classify teachers and health personal salaries as investment, and not as current expenditures, considering that they contribute as much as schools and hospitals to build human capital and are equally necessary to deliver education and health services. We follow this practice in this paper. These indicators need not be strongly related to the capacity to raise local taxes, as it was already observed that Colombian municipalities receive significant transfers from

considering that they contribute as much as schools and hospitals to build human capital and are equally necessary to deliver education and health services. We follow this practice in this paper. These indicators need not be strongly related to the capacity to raise local taxes, as it was already observed that Colombian municipalities receive significant transfers from the central government to finance service provision (especially for education, health and water supply and sewerage services) and as many municipalities receive important resources7 7

from oil and mi ning royalties 9 , which can be invested more freely . Indeed, for most municipalities local taxes are a small fraction of the total resources at their disposal. We used several investment and savings capacity indicators. We estimated investment ratios as a fraction of total expenditures, that indicate the current capacity to transform overall revenues into assets required for service delivery , (rather than splurging them in administrative and bureaucratic costs) , as well as per capita investments in health a nd education, that specifically consider the potential expansion of these services . We also used savings ratios as a fraction of total current revenues (local taxes, transfers and royalties), that determine the long term capacity to invest and ensure long term sustainability of the expansion of service delivery capacities. Third, we used indicators of physical capabilities, which gauge the current stock of physical and human assets dedicated to basic public services’ provision: number of hospitals, health posts, teachers and judges per capita and per square kilometer. Fourth and last, we used several indicators of operational capabilities, intended to assess those capabilities required to invest and to use the current stock of assets in an efficient way to produce quality services that respond to citizens ’ needs and priorities. We relied on two alternative sources of data: (1) Indicators of government’s transparency in public contracting, accountability, public workforce’s human capital and managerial competence, estimated by Transparency International for a sample of municipalities (unfortunately a small and not a representative sample, as important regions –such as Antioquia and the coffee growing areasare heavily under-represented); (2) Indicators of coverage and quality of the

estimated by Transparency International for a sample of municipalities (unfortunately a small and not a representative sample, as important regions –such as Antioquia and the coffee growing areasare heavily under-represented); (2) Indicators of coverage and quality of the collection and organization of administrative information and compliance with norms about contracting and delivery of reports to control units; as well as about disclosure ( e.g., on line

9 Initially, royalties were shared between the national government and producing departments and municipalities in fixed shares determined by law. The 1991 Constitution elevated these provisions to constitutional norm, and included as beneficiaries other municipalities in producing Departments and along transport routes and port facilities. The National Government share was transferred to a Royalty Fund that financed investment proposals by any subnational agency. A Constitutional amendment in 2012 distributed all royalty proceeds among subnational agencies, reducing the share of producing Departments and Municipalities 7

physical and human assets dedicated to basic public services’ provision: number of hospitals, health posts, teachers and judge

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Título: CAF - State Capabilities in Colombian Municipalities Measurements and Determinants
Autor: Banco de Desarrollo de América Latina
Categoría: Infralegal
Área del derecho: Cumplimiento
Año: —